How will inflation impact consumer confidence and spending?

Consumers are feeling the pinch, and many are rethinking their buying behaviors as a result—by cutting back on their overall expenditure, reducing spend on non-essential items and switching from premium products to lower-priced own-brand items. 

1. Rising inflation means consumers will buy less overall

Many consumers are tightening their purse strings in response to the rising cost of living. According to data analytics firm Kantar, 47% of U.K. consumers have made or are expecting to make cutbacks in their general expenditure due to inflation. In the same vein, research by intelligence company Morning Consult shows that 56% of U.S. consumers are willing to shop less overall. Shoppers are prioritizing staples over discretionary goods and big-ticket items—some 75% said they will delay the purchase of an electronic device, while only 36% said they will buy fewer groceries. “When it comes to basic staples, demand has been quite resilient,” said Pannuti.

Even so, sales of household essentials are declining, with volume growth at major fast-moving consumer goods (FMCG) companies taking a hit. Data from market researcher NielsenIQ shows that sales volumes at U.K. supermarkets plunged in July this year by -9.4% for meat, fish and poultry, -8.1% for household items and -6.4% for packaged groceries. 

Despite this, companies have reported healthy 2Q earnings, largely bolstered by price hikes. “Corporates are starting to see slowing volumes, but when you factor in price rises of 10% or more, the overall impact on revenue is limited. The positive tailwinds of cost inflation are helping earnings,” said Pannuti. A case in point is Unilever. While the consumer goods conglomerate posted an underlying sales growth of 8.1% for the first half of 2022, this was driven by an increase of 9.8% in prices—volume sales actually decreased by 1.6%.

3. The effects of inflation on cost of living will be uneven across regions

J.P. Morgan Research expects Europe to be the epicenter of the cost-of-living squeeze as it is highly exposed to geopolitical tensions and accelerating inflation. “While Europe has held up quite well on the whole, the backdrop for the region gets even tougher in 2H 2022, when further pressures on consumer budgets are expected due to increased energy costs, and when the tailwinds from reopening start to fade,” said Pannuti. As such, consumers in this region may feel most compelled to trade down to cheaper alternatives. 

In contrast, consumers in the Americas are likely to fare better. “To date, the U.S. has been the most resilient market through the pandemic and the period of rising inflation. Latin America has been the most dynamic region, with strong pricing and resilient volumes,” added Pannuti.

In Southeast Asia, the picture is fairly mixed, with some markets such as Vietnam seeing greater improvement in consumer confidence than other places such as Thailand, where government support packages are abating. “On the whole, growth in Southeast Asia has improved against two years of lower activity,” said Pannuti.

Consumer confidence is generally stronger in emerging markets, which are still rebounding from the COVID-induced slowdown. “For consumers in many of these markets, inflation is part of their day-to-day. They’re used to dealing with the effects of inflation,” said Pannuti.

Overall, despite these uneven impacts, inflation remains very much a pertinent issue across the globe. It will continue to impact the cost of living, shaping consumer confidence and spending habits in the months to come.